Valuations in EMs like India getting better: Jerome Booth

Jerome Booth, Ashmore Investments believes that equity valuations in emerging markets like India are getting better and sees lot of opportunities for investing in the country. 

"The prospective PE ratio here is several percentage points lower," he said in an interview to CNBC-TV18. Booth is betting on few small cap/midcap stocks where he sees tremendous value and growth potential. Like most experts, he also sees India growing at higher rate only if key structural reforms come through. "The recent power outages are hopefully a big opportunity for the government." Below is the edited transcript of Booth’s interview with CNBC-TV18. Q: There has been lot of interpretations of what Mario Draghi said after that ECB meeting, initial disappointment and then the recovery in sentiment. What do you think should be the real takeaway? A: I was very encouraged by Draghi's comments, because he is basically saying that he will provide liquidity to ensure that bond yields come down and why that isn’t fully funded and that's a major break from the past. This means that there is real stopgap, but he did it in a competitive way because he is also saying that countries have to be in a series of agreement such as they can get EFSF funding. They have to therefore go through external conditionality and the ECB is simply not writing blank cheques. That obviously, is a compromise, but is the right compromise. He also encouraged markets by saying that the issue of preferred creditor status for official owners of Greek debt is something that is going to be addressed. It was a move to encourage private buyers back into the bond market in due course. He also said that he was going to intervene in the short-end of the curve and that led to 10-year yields on Spanish and Italian debt still quite wide. That’s appropriate for Central Bank to target the short-end, but it gives no opportunity in due course for people to buy what is still attractive yields. All in all it was a pretty good package. He didn’t start printing money immediately. That’s why markets were disappointed after the build-up last week. But that would have been merely a repeat. It would have let governments off the hook and we would have seen possibly the same dynamics as we saw with LTROs. In other words a bit of short relief, but no solution to fundamental problems. This is a much better plan over time to solve some of the fiscal and credibility problems. Q: What kind of resolution do you see in the near-term on the issue of usage of EFSF funds or all that debate about getting a banking license for the ESM? A: There is a tradeoff between having the thought of ESM having a banking license and not having euro bonds issued with joint several liability. The Germans would prefer to have the EFSF or the ESM as a bank. But what Draghi said makes that less an important point. Because what he is saying is if there is an agreement, the ESM does not need huge resources because the ECB would be there to support buying bond presumably in the secondary market. This means that there is less need for a banking license. Q: What do you make of the stance from the Germans? Initially it was one of resistance, but in the last couple of days they also seemed to be tacitly agreeing that they can go along with the Draghi plan? A: We are guessing clearly some change in rhetoric from Germany. There is still resistance from the Bundesbank very clearly and Draghi referred to that in his comments. It’s important that the ECB is seen to be constrained in its actions for coming up with this compromise. By only agreeing to intervene at the short-end he is assuaging some of the problems. The Germans population and the political elite are pragmatic. They realize that this is probably as good a solution as is possible. We have actually got a workable compromise. _PAGEBREAK_ Q: Do you think all this is good enough to keep this risk on kind of sentiment going for a few more weeks in global equities? A: Risk is poorly understood by the markets. We assume that risk is directly related to volatility. It is not. The risk we care about most is large permanent loss and risk varies depending upon your time scale and your liabilities and how much information you have and therefore how you can maybe get out of a situation quicker than others. I would describe what is going on as another set of events in a long process of deleveraging, but also in a process where people are coming to terms with risks. A lot of these big risks are unpleasant. The risks of major catastrophe in the financial sector or in the dollar are out there. There are major liquidity problems in heavily indebted developed countries (HIDC) countries. But people's perception of risk is becoming more realistic. That’s for many people a Eureka moment. It is a sudden one-off event, but it happens for different people at different times. As time passes, people are more and more aware that there is no such thing as a risk free asset. But you can't just ignore 50% of the world's economic output in the emerging markets in another words and just assume that’s risky somehow and Europe and US is not risky. This is a very simplistic way of looking at the world and frankly we got to get over that. Having all these problems arise, you know it gradually erodes that prejudice. But it will take years. Most people die with the prejudices they obtain when they are teenagers. It will take longer than a few months or years. The idea that risk is on or off is a very simplistic idea. What we are seeing is greater comfort level with the tail risks in Europe, that’s good. I would rather think that that would merely focus attention back on the US for a bit which is of course the other economy with major risk. Q: What are you expecting from the US then? There is a Jackson Hole Meeting coming up and then the September Fed meeting. Do you think we will have more by way of quantitative easing? A: Impossible questions. I don't know what probability is. But clearly these could be decision making, particularly actually the Fed meeting at Jackson Hole. We know more or less what the trajectory now is in Europe. We have seen what Draghi said. It is a question of a few weeks to get the mechanics. There the key new piece of information will be you know Italy and Spain's willingness to sign onto a program of support with conditionality attached. That is the key bit of news, so action may come from ECB. In the Fed, we really don't know. It would be news if there were more quantitative easing in a way that it is less noble in Europe. Q: Any thoughts on how to approach equities in India given current valuations then? A: Relative to other emerging markets one can debate. It depends on the asset class, whether it is equities or bonds or currencies etc. I would say that the emerging markets as a whole look better valued. If we are talking about equities specifically, the valuations in India have got better as they have in other emerging markets. The prospective PE ratio is you know several percentage points lower and we have a lot of opportunities in India. We are very active in few smaller cap or midcap stocks which are offering tremendous value. There is a lots of potential there. India has the potential to grow at a much higher rate, but it requires some big structural reforms. The recent power outages are hopefully a big opportunity for the government. Nobody can stand there and credibly say that they don't believe this is a problem anymore. It makes it politically easier to push the reforms that are required and we all know what needs to be done, it is not rocket science. So this is an opportunity but it requires political leadership. With some good action from the government now, albeit there is a window before the election, we will see much more confidence, much more investment that will allow RBI to cut interest rates again. We will see a very different picture hopefully in a year’s time in India.